-- This Week In The Money --

Analysis, Perspective, Trading Strategy

At the Edge of Chaos: Stocks Are Hostages to China Trade Deal

Editor Joe Duarte in the Money Options

The Federal Reserve’s money pumping operations into the repo market have kept the stock market from embarking on a downtrend, yet the big elephant in the room remains the U.S.-China trade war, which means that aside from the usual potential potholes -earnings, the Fed, and politics in general- the major influence on stock market volatility these days remains the daily trade war news grind.

Indeed, complex adaptive systems such as the Markets-Economy-Life ecosystem (MEL), by nature, are fluid entities whose most dramatic moves begin at a place that physicists call “the edge of Chaos.” This is where Order and Disorder collide and the forces of Complexity, the ruling force of all systems in the Universe, take over and events emerge onto their next behavioral phase. Moreover, that’s precisely where the financial markets stand as we head into the last five weeks of 2019, at the edge of Chaos.

Kohl’s Crashes into Chaos as Pfizer Closes in on Emergence

A few weeks ago, it seemed as if the stock market was about to power much higher, but last week’s action proved that yet again the unpredictability of events is at extremes. For example, take the drubbing in shares of retailer Kohl’s (KSS), which I profiled in a positive light here last week, albeit with a caveat when I noted: “I do suggest a bit of caution as KSS reports earnings on 11/19. And even though the current trading pattern suggests that investors are expecting good news, keeping a well placed sell stop under any shares will help you sleep at night especially if KSS delivers a negative surprise in the report and the shares get crushed.”

Of course we all now know that Kohl’s got crushed as it missed its earnings and revenues while downgrading its future guidance. That the company missed badly suggests that despite its best efforts, its business model is not working, and that its attempt to be the next Amazon.com isn’t measuring up. Kohl’s failed its encounter with Complexity and is now well into Chaos territory, where the trading pattern is no longer reliable and is instead predictably unpredictable.

Accordingly, it seems logical to consider that what happened to Kohl’s can happen to any stock at any time in the not too distant future, as the Markets Economy Life (MEL) ecosystem starts to consider the general outlook for the future in an increasingly uncertain world. Consider that people make financial decisions based on how the interaction between the stock and bond markets along with Federal Reserve policy affects the value of their 401(k) plans and their ability to borrow money through the home equity lines of credit.

Customers make financial decisions based on the information that’s available at the time of transaction such as the price, quality, and general quality of merchandise they find at department stores along with their own financial situation. So, in this case, clearly something didn’t add up which means that even if Kohl’s stores may be full, the company’s results are more about whether enough people are making purchases while they are in the store or are plugged into their app. Furthermore, this seems like a KSS problem, not a retail problem given the positive results from rivals Target (TGT) and JW Nordstrom (JWN).

And while we can parse the retailing sector’s recent fate, shares of the pharmaceutical sector’s biggest wallflower Pfizer (PFE) continue to edge closer to a reversal of fortune as the stock is nearing a test of its 200-day moving average.

As I noted in my recent article, Pfizer’s shares have languished of late as it lost its patent on its blockbuster nerve pain drug Lyrica and made some questionable decisions such as trying to launch a long acting morphine tablet into a crowded market just as the opioid war was starting to heat up. Moreover, I also noted that there were some interesting pipeline and active drug developments that were worth noting, such as its Eliquis blood thinner and its growing Biosimilar (generic biotech drugs) portfolio along with a heart drug failure drug (Vyndagel) for the treatment of what may not be as rare a form of the disease as previously thought.

Moreover, it’s starting to become evident that Pfizer’s cancer drugs are gaining ground as Inlyta has been approved for combination treatment with Merck’s (MRK) blockbuster Keytruda in certain forms of renal cancer while PFE’s CDK inhibitor Ibrance delivered $1.3 billion in global sales in the most recent quarter.

 

 

The shares are indeed starting to gather some momentum and there may be some further good news ahead if the FDA expands the indications for Xtandi, a drug that blocks testosterone in advanced cases of prostate cancer. The decision date is expected sometime in December 2019.

If you are intrigued as to how to use the inner workings of Complexity in your trading come see me at the February 2020 Money Show in Orlando where I will be discussing the ins and outs of the Markets-Economy-Life ecosystem (MEL) in my presentation titled “Trading at the Edge of Chaos” and how I use it to pick winning stocks. Attend free to watch my presentation, meet me up-close and personal, and ask your most pressing questions. Discover the best investing and trading opportunities and learn how to adjust your portfolio and strategies for 2020’s unique market conditions. For information on how to register and details on the presentation go HERE.

Advance-Decline line is in No Man’s Land

The New York Stock Exchange advance decline line (NYAD) has been the most accurate indicator of the stock market’s trend since the 2016 presidential election, which is why I feature it in every one of my Market Summary columns. Moreover, in the last few weeks it has been signaling a steady uptrend in prices by making at least one new high every week.

 

 

Unfortunately that pattern changed on the week ending 11/22/19. Certainly, NYAD is not signaling a bearish trend at the moment. But what’s troubling is that it seems to have lost a bit of its recent momentum, which means that if we don’t get a new high in the next few days, and the current pattern persists, we may be close to a meaningful pullback in stocks before the year is over. For now, if NYAD can hold above its 50-day moving average the uptrend remains intact.

 

 

individual stocks are still getting wrecked on news, which suggests that if the economy slows, the bad news will spread.

 

 

Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a tight range between 1.75 and 1.98%.

 

 

A move above that 1.98% area could take the yield to a test of 2.1%. If that level is taken out, I would expect some very large amounts of handwringing and outright selling in the stock market.

Things could get Dicey unless the U.S. and China Come up with Some Good Trade News

Complexity is a fluid force so we must be ready for anything in the next few days to weeks. At the moment, however, the stock market looks worn out and perhaps it’s just tired of waiting for a U.S.-China trade deal. I’m thinking that at this point any deal would be better than no deal. Moreover given the mixed earnings in retailing these days and no huge pop in PMI or other economic data, there may be some pockets of the economy that are softer than what even soft data suggests.

As a result, this is a good time to be a bit more cautious, but not all out bearish as too many things could change in a hurry and we may be off to the races again in a heartbeat. Certainly it’s worth keeping shares that are working, and to continue to have a handy shopping list. But it’s also not a bad time to bring back some hedges and to take some profits on any big gainers left in portfolios.

Finally, the Thanksgiving trading week tends to be quiet, which means that if the U.S. and China decide to turn on the good news flow this week, it is possible that stock prices could move decidedly higher, albeit on lower than usual volume.

Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best sellingTrading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com - now in its third edition, The Everything Investing in your 20s and 30s and six other trading books.

His latest Best Selling book The Everything Investing in your 20s & 30s at Amazon and The Everything Investing in your 20s & 30s at Barnes and Noble.

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